- What is Demand Planning & Forecasting?
- Food & grocery - a dynamic market
- Key demand planning challenges
- Forecasting principles
- 10-Step Forecasting Framework
- Measuring forecast accuracy
- Collaboration is key
- The way forward

What is Demand Planning & Forecasting?

Demand planning and forecasting is a set of business processes that involves predicting future customer sales demand and aligning production and distribution capabilities to meet that demand forecast. The process involves a number of different functions within the total supply chain, including marketing, sales, finance, operations & production, distribution and store operations - both at the retailer and supplier, which requires the sharing of timely data, the accurate processing of that data, and agreement on joint business plans.
 

Food & grocery - a dynamic market

The food & grocery marketplace remains heavily promotion-led and price sensitive, which means that customer demand can be volatile. Customer loyalty is relatively low - meaning that shoppers easily switch stores and the products they purchase - and so retailers and suppliers need to work hard to differentiate their offers. A strong, consistent presence at the shelf to ensure products are available when customers wish to purchase them, therefore remains a major industry priority.
 

Key demand planning challenges

According to IGD research, the top 3 challenges to effective demand planning are:

1. Late confirmation of requirements
2. Lack of collaboration with trading partners
3. Over-optimistic sales forecasts

A mis-alignment in the critical path of the demand planning process, where key milestones require certain information to be shared, continues to show that both retailers and suppliers would like information to be agreed and shared in a much more timely fashion. Interestingly, retailers rank ‘missing information’ as their greatest challenge, whilst suppliers placed ‘a late confirmation of requirements’ at the top of their list.
 

Forecasting principles

• Forecasts should always be initially calculated in VOLUME.
• Financial targets should NOT drive volume forecasts.
• Forecasts should be created at the highest aggregate level, never at SKU level (otherwise errors at line level will be compounded).
• Sales forecast values are calculated using baseline and promotion/new product volumes.
• Roles and responsibilities are very important:
  • Baseline forecasts should be left to Demand Planners.
  • Promotional & New Product forecasts should be managed by Sales.
• BUT, Sales should be responsible for the total forecast for their customer: baseline plus promotions/new products!
• Determining a correct baseline is crucial to an accurate promotional forecast.

10-Step Forecasting Framework

Measuring forecast accuracy

The key to good forecasting is stability in the accuracy, as this will help set correct inventory levels, thus avoiding over-stocks and out-of-stocks (OOS). Where forecasts are consistently higher than the actual sales, inventory levels will rise; where forecasts are consistently lower than actual sales, the service levels issues will increase.
 

Benefits of Measuring Forecast Accuracy:

IGD research into demand planning identified a number of key benefits from measuring forecast accuracy:

• Improved inventory management
• Clear business focus & accountability
• Improved supply management
• Improved promotional & NPD execution
• Financial gains
• More accurate future forecasts
• Clear performance management
• Management by exception

Measurement calculations:

Absolute Forecast Accuracy

Forecast Bias

Collaboration is key

A lack of collaboration with trading partners is seen as a key frustration for suppliers in the demand planning process, and indicates that despite efforts by some major retailers to share information, this is not common practice across the industry, and is not sufficient on its own.

Areas of collaboration can include:

• Cross Account Communication: sharing promotional information between retail account managers
• Communication of changes to the promotion schedule
• Standardisation of: process, technologies, definitions, models and tools
• The sharing and application of industry learning across markets, not just within markets

The way forward

Flexibility in responsiveness and the robustness of integrated business planning are important factors in delivering real-time demand-led supply chains, but companies need to take a more systematic approach to demand planning and forecasting. There is a need to strive for deeper collaborative supply chain practices - both within organisations and with trading partners - and so developing collaborative supply chain practices will drive business capability, optimise service levels, reduce wastage and maximise on-shelf availability.

Related Items:

- Building Supply Chain Engagement Capability
- Demand Planning
- Creating a Demand Driven Supply Chain
- Driving Out Stock Costs